Drought combined with the Covid-19 coronavirus might knock economic growth enough to cause a modest recession, a leading economist says.
BNZ head of research Stephen Toplis said the threat from drought seemed to have been overlooked in the headlines generated by the virus.
"What at first seemed like a regional issue has now morphed into a North Island-wide problem and there is no immediate relief in sight," he said in a weekly commentary.
He said the flooding in the bottom of the South Island was also affecting agricultural production.
Toplis said a full scale drought had in the past knocked as much as 1 percentage point off growth, although at this stage the BNZ was forecasting a lesser, more conservative impact.
However, he said the effect might be compounded by the virus's impact.
"What makes things worse is that the two issues run headlong into each other to cumulatively exacerbate each other's impact."
He said drought normally increased meat production as farmers sent animals to meatworks, but market prices for meat had been falling because of the virus.
Similarly a drop in dairy production because of drought would usually lift prices but any gains would be undone by the virus's impact on prices.
"The first two quarters of 2020 are where the economy is most vulnerable to a technical recession."
A recession is defined as two consecutive quarters of negative growth.
Toplis said even if the worst case outlook did occur the Reserve Bank might need to support the economy through a cut in interest rates.
Last week the RBNZ held the official cash rate steady at a record low 1 percent saying it expected the coronavirus to have a short, sharp shock on the economy.